Cyprus To Get Bailout Funds

Cyprus is a member of the Eurozone, but its economy is less than a tenth that of troubled Greece and less than 1% that of Germany, with a GDP of about €18 billion. Unemployment on the island is at 22%; one of the highest levels in the EU. The island has a population of 800 000 people and its debt burden is approximately 80% of the nation’s GDP.

Cyprus has a considerable off-shore banking sector and the root of Cyprus’s problems is exposure to the Greek sovereign debt crisis. As an investor in Greek debt, Cypriot banks were hit hard by the write-down (or haircut) forced on creditors when Greece secured its second EU/IMF bailout. The cost of long-term borrowing has hit completely unsustainable levels (12%). Cyprus has turned to its EU partners for a bailout and is likely to receive €17 billion (roughly the equivalent of the nation’s GDP) by the end of the month. Without obtaining this financial life-line, the nation risks being unable to meet its obligations as early as May 2013.

It is likely that Cyprus will agree to extra measures to ensure that its banks are not used for money laundering purposes – a particular concern of Germany, apparently. There had been some talk of requiring Cyprus to participate in a “bail-in” of its banks which would have meant depositors taking a share of losses. Fear of this has already seen a flight of deposits from Cypriot banks, but it looks unlikely if this will come to fruition (it was not required of any other bailout recipients as a condition of their initial bailout).

There has been some talk that Cyprus would be forced out of the Euro if the bailout cannot be secured since the size of the economy and potential exposure to other EU member states is (relatively) small. Obviously, the exit of any Eurozone member could produce a significant loss of confidence in the durability of the single currency and is likely to be avoided at all costs – especially since the price tag is low.